Suppose that the price level in the US is 10,500 US dollars per consumption bundle, the price level in Brazil is 28,550 Brazilian Real (BRL) per consumption bundle. The actual exchange rate is BRLUSD 2.2205.

1) What is the implied exchange rate for BRLUSD according to the absolute purchasing power parity?

a. BRLUSD 2.0500

b. BRLUSD 2.2205

c. BRLUSD 2.8550

d. BRLUSD 2.7190

2) Which of the following statements is correct?

a. BRL is undervalued against USD.

b.The internal purchasing power of USD10,000 in the US is 0.9524 consumption bundles.

c.The internal purchasing power of BRL10,000 in Brazil is 2.8550 consumption bundles.

e. Both (a) and (b).

3) ABC, a Germany-based company sells its products in US. Typically, it takes 6 months to receive its revenue in USD. To hedge the transaction exchange risk, which of the following strategy would work?

a.Long a 6-month GBPUSD forward

b.Issue a short-term Eurobond in US

c.Issue a short-term foreign bond in US

d. Write a USD put options